Letter Agreement Regarding Series A Preferred Stock Rights between GulfWest Energy Inc., GulfWest Oil & Gas Company, and Investors (April 22, 2004)

 This Letter Agreement (this "Agreement") is entered into as of April 22, 2004, by and among GulfWest Energy Inc., a Texas corporation (the "Parent"), GulfWest Oil & Gas Company (the "Company") and the investors listed on the signature page hereto (each an "Investor" and, collectively, the "Investors"). RECITALS WHEREAS, the Investors acquired 8,000 shares (the "Initial Shares") of the Company's Series A Cumulative Exchangeable Preferred Stock, par value $.01 per share, of the Company (the "Preferred Stock"); WHEREAS, the Investors desire to be granted by the Parent, and the Parent desires to grant to the Investors, certain rights contained in this Agreement and the Statement of Resolution (as defined below); NOW THEREFORE, in consideration of the representations, covenants and agreements contained herein, and certain other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Definitions. For purposes of this Agreement, the following terms have the following meanings: "Securities Act, Exchange Act or Act" refers to the Securities Act of 1933, as amended from time to time. "Commission" refers to the Securities and Exchange Commission. "Common Stock" means the common stock, par value $.001 per share, of the Parent exchangeable for the Preferred Stock. "Exercise Price" refers to the per share purchase price of the shares of the Underlying Common Stock subject to the Penalty Warrants (as hereinafter defined) and issuable upon exercise, in whole or in part, of the Penalty Warrants. The Exercise Price for each share of Underlying Common Stock shall equal $.35 per share. The Exercise Price is subject to adjustment as provided in Section 4.8 herein. "Final Exercise Date" refers to the last day of the Exercise Period of the Penalty Warrants, which is the fifth anniversary of the date of issuance. "Holders" refers to all of the holders of the Exchange Common Stock issued by the Parent upon exchange of the Preferred Stock, the holders of the 1  Penalty Warrants, the holders of the Underlying Common Stock , or the holders of the Senior Debt, as the context denotes. "Penalty Warrants" refers to warrants to purchase Common Stock to be issued to the Investors if certain Registration requirements are not met. "Register," "Registered" and "Registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or order of effectiveness of such registration statement or document. "Registrable Securities" means any Exchange Common Stock which has been issued pursuant to the exchange of the Initial Shares together with any Common Stock issuable upon the exercise of any penalty warrants. "SEC" means the U.S. Securities and Exchange Commission. "Statement of Resolution" refers to the Statement of Resolution Establishing and Designating a Series of Shares of GulfWest Oil Company, Series A Preferred Stock, par value $.01 per share, which includes the requirement for this Agreement "Subordination" means the Subordination of the Preferred Stock to the prior payment in full of all amounts that may be owed from time to time under that certain Amended and Restated Credit Agreement dated as of April ___, 2004, among the Company, each of the Lenders from time to time party thereto, and Highbridge/Zwirn Special Opportunities Fund L.P. as administrative agent for the Lenders (the "Credit Agreement") and any indebtedness that replaces or refinances the indebtedness under the Credit Agreement (collectively, the "Senior Debt"). Such subordination is for the benefit of the holders of the Senior Debt and may be enforced against the Company and the holders of the Series A Preferred Stock by the holders of the Senior Debt. "Underlying Common Stock" refers to the shares of the Common Stock issuable or issued under this Agreement pursuant to the exercise, in whole or in part, of the Penalty Warrants. 2. Representations and Warranties. The Parent and the Company represents and warrants to the Investor as follows: 2.1 Corporate and Other Action. The Parent and Company have all requisite corporate power and authority and has taken all necessary corporate action, to authorize, execute, deliver and perform all of its obligations under this Agreement. This Agreement has been duly authorized, executed and delivered by the Parent and Company, and is a legal, valid and binding agreement of the Parent and Company enforceable against the Parent and Company in accordance with its terms. No authorization, approval, consent or other order of any regulatory authority (including the rules and regulations of any trading market or quotation system applicable to the Parent or an of its subsidiaries) is required for such authorization, execution, delivery, performance, issue or sale. 2  2.2 No Violation. The execution and delivery of this Agreement, the consummation of the transactions herein contemplated and the compliance with the terms and provisions of this Agreement will not conflict with, or result in a breach of, or constitute a default or an event permitting acceleration under (i) the Articles of Incorporation or Bylaws of the Parent or Company or any indenture, mortgage, deed of trust, note, bank loan, credit agreement, franchise, license, lease, permit, or any other agreement or instrument to which the Parent or Company is a party or (ii) any judgment, decree, order, statute, rule or regulation applicable to the Parent or Company (including federal and state securities laws and regulations and the rules and regulations of any trading market or quotation system applicable to the Parent or an of its subsidiaries. 2.3 Validity. The shares of Common Stock of the Parent issued upon exchange of the Series A Preferred Stock have been duly authorized and when issued will be validly issued and outstanding, fully paid and nonassessable and free of preemptive rights liens and charges. 2.4 Capitalization. As of the date hereof, the authorized capital stock of the Parent consists of 40,000,000 shares of Common Stock, of which as of the date hereof, 18,492,541 shares are issued and outstanding, none are held as treasury shares, 5,000,585 shares are reserved for issuance pursuant to options and warrants, 500,000 shares are reserved for issuance upon conversion of the Parent's Series D Preferred Stock, 2,250,000 shares are reserved for issuance upon conversion of the Parent's Series E Preferred Stock and 1,000,000 shares are reserved for issuance upon conversion of the Parent's Series F Preferred Stock. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. No shares of the Parent's capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Parent. The Company's Common Stock has been pledged to the holder of the Senior Debt by the Parent, who is the sole shareholder of the Company. The Parent's outstanding options and warrants contain customary anti-dilution and piggy-back registration provisions and the Parent's Series E and Series F Preferred stock contain redemption and registration provisions but none will be triggered by the issuance of the Preferred Stock or the Common Stock described in this Agreement. Except as described in this Section 2.4, there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Parent or the Company, or contracts, commitments, understandings or arrangements by which the Parent or the Company is or may become bound to issue additional shares of capital stock or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Parent or the Company. Except for the registration rights provided for herein, there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Act. There are no outstanding securities or instruments of the 3  Company or any of its subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to redeem a security of the Company or any of its subsidiaries. There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Preferred Stock or the Common Stock as described in this Agreement. 2.5 Integrated Offering. Neither the Parent, the Company, nor any of their affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Preferred Stock or Common Stock under the Act or cause this offering of the Preferred Stock or Common Stock to be integrated with prior offerings by the Parent for purposes of the Act or any applicable shareholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Parent are listed or designated, nor will the Parent or any of its subsidiaries take any action or steps that would require registration of any of the Preferred Stock or Common Stock under the Act or cause the offering of the Preferred Stock or Common Stock to be integrated with other offerings. 2.6 Application of Takeover Protections. The Parent and its board of directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws of the state of its incorporation which is or could become applicable to the Investor as a result of the transactions contemplated by this Agreement, including, without limitation, the Parent's issuance of the Common Stock and the Investor's ownership of the Preferred Stock and/or the Common Stock. 2.7 Rights Agreement. The Parent has not adopted a shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Parent, except for customary change in control arrangements in Employment Agreements. 2.8 Foreign Corrupt Practices. Neither the Parent, nor the Company, nor any director, officer, agent, employee or other person acting on behalf of the Parent or the Company has, in the course of its actions for, or on behalf of, the Parent, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. 2.9 SEC Documents; Financial Statements. Since January 1, 2002, the Parent has filed all reports, schedules, forms, statements and other 4  documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC (except as they may have been correctly amended), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Parent included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Parent as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 3. Exchange for Common Stock. The Parent hereby agrees to exchange the Series A Preferred Stock for its Common Stock (the "Exchange Common Stock"), under certain terms and conditions contained in Agreement, at any time by the holder by providing written notice (the "Exchange Notice") to the Company of the holder's election to exchange any or all of the shares of the Series A Preferred Stock for Exchange Common Stock. The shares of Exchange Common Stock to be issued upon exchange shall be issued by the Parent once the holder of the Series A Preferred Stock to be exchanged tenders the certificates evidencing such shares of Series A Preferred Stock to the Company for cancellation. 3.1 Exchange Price. Each share of Series A Preferred Stock shall be exchangeable in accordance with this Section 3 into the number of shares of Exchange Common Stock that results from dividing the liquidation value for Series A Preferred Stock (including the stated liquidation preference and accrued but unpaid dividends) by the exchange price for Series A Preferred Stock that is in effect at the time of exchange (the "Exchange Price"). The initial Exchange Price for the Series A Preferred Stock shall be $.35 per share. The Exchange Price of the Series A Preferred Stock shall be subject to adjustment from time to time as provided below. 3.2 Adjustment Upon Exchange Common Stock Event. Upon the happening of an Exchange Common Stock Event (as hereinafter defined), the Exchange Price of the Series A Preferred Stock shall, simultaneously with the happening of such Exchange Common Stock Event, be adjusted by multiplying the Exchange 5  Price of Series A Preferred Stock in effect immediately prior to such Exchange Common Stock Event by a fraction, (a) the numerator of which shall be the number of shares of Common Stock issued and outstanding immediately prior to such Exchange Common Stock Event, and (b) the denominator of which shall be the number of shares of Exchange Common Stock issued and outstanding immediately after such Exchange Common Stock Event, and the product so obtained shall thereafter be the Exchange Price for Series A Preferred Stock. The Exchange Price for Series A Preferred Stock shall be adjusted in the same manner upon the happening of each subsequent Exchange Common Stock Event. As used herein, the term "Exchange Common Stock Event" means, Subject to the Subordination, (i) the issue by the Parent of additional shares of its Common Stock as a dividend or other distribution on its outstanding Common Stock, (ii) a subdivision of the outstanding shares of its Common Stock into a greater number of shares of Common Stock or (iii) a combination of the outstanding shares of its Common Stock into a smaller number of shares of Common Stock. 3.3 Adjustment for Other Dividends and Distributions. Subject to the Subordination, if at any time or from time to time after the Original Issue Date the Parent pays a dividend or makes any other distribution to the holders of its Common Stock payable in its securities other than shares of Exchange Common Stock, then in each such event provision shall be made so that the holders of the Series A Preferred Stock shall receive upon exchange thereof, in addition to the number of shares of Exchange Common Stock receivable upon exchange thereof, the amount of securities of the Company that they would have received had their Series A Preferred Stock been exchanged into Exchange Common Stock on the date of such event (or such record date, as applicable) and had they thereafter, during the period from the date of such event (or such record date, as applicable) to and including the exchange date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 3 with respect to the rights of the holders of the Series A Preferred Stock or with respect to such other securities by their terms. 3.4 Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the exchange of the Series A Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than by an Exchange Common Stock Event or a stock dividend, reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 3), then in any such event each holder of Series A Preferred Stock shall have the right thereafter to exchange such Series A Preferred Stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the number of shares of Exchange Common Stock into which such shares of Series A Preferred could have been exchanged immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. 3.5 Certificate of Adjustment. In case of an adjustment or readjustment of the Exchange Price for Series A Preferred Stock, the 6  Company, at its expense, shall cause its Chief Financial Officer to compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of the Series A Preferred Stock at the holder's address as shown in the Company's books. 3.6 Dilution or Impairments. Subject to the Subordination, the Company and the Parent will not, by amendment of the certificate or articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, intentionally avoid or seek to avoid the observance or performance of any of the terms hereunder, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate hereunder. Without limiting the generality of the foregoing, the Parent: (a) shall at all times reserve and keep available, solely for issuance and delivery upon the exchange of the Series A Preferred Stock, all shares of the Common Stock from time to time issuable upon such exchange; and (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassesable shares of Common Stock upon the exchange of the Series A Preferred Stock from time to time outstanding. 3.7 Fractional Shares. No fractional shares of Exchange Common Stock shall be issued upon any exchange of Series A Preferred Stock. Any resulting fractional shares shall be rounded up to the next whole share. 4. Registration of Registrable Securities. The Investor acknowledges that the Exchange Common Stock, the Penalty Warrants (if any) and the Underlying Common Stock (if any) have not been registered under the Act or under any state securities laws and agrees not to make any sale or other disposition of the Registrable Securities except pursuant to a registration statement that has become effective under the Act, unless such sale or disposition is exempt from registration under the Act. 4.1 Required Registration. The Parent agrees to file with the Commission a shelf registration statement on Form S-1 for a public offering under the Act (the "Required Registration Statement") to cover public resales of the Registrable Securities held by the Investors in each case who satisfy certain conditions relating to the providing of information in connection with the Required Registration Statement. The Required Registration Statement shall be a so-called "shelf" registration under Rule 415 of the Act. The Parent shall file the Required Registration Statement with the Commission as soon as reasonably practicable following the date hereof and shall be obligated to use its best efforts, including the filing of any amendments or supplements thereto, to have any such Required Registration Statement declared effective under the Act and the rules and regulations promulgated thereunder as soon as practicable after the filing date thereof. The failure to file the Required Registration Statement with 7  the Commission and to have the Required Registration Statement declared effective under the Act within certain time periods shall result in Penalty Warrants being issued by the Parent as provided in Section 4.5 hereof. The Parent shall also take such action as may be necessary to keep any such Required Registration Statement and accompanying prospectus effective and current under the Act at its expense for a period of 24 months after the effective date of the Required Registration Statement. The Parent's obligation under this paragraph shall be limited to one registration statement and such amendments, supplements and other filings thereafter as may be necessary to keep such registration statement current thereafter as provided herein for a period of 24 months after the effective date of such registration statement. 4.2 Parent's Obligations in Registration. In connection with the Required Registration Statement, the Parent shall: (a) notify the Investor as to the filing thereof and of all amendments or supplements thereto filed prior to the effective date of such registration statement; (b) comply with all applicable rules and regulations of the Commission; (c) notify the Investor immediately, and confirm the notice in writing, (1) when the registration statement becomes effective, (2) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceedings for that purpose, (3) of the receipt by the Parent of any notification with respect to the suspension of qualification of the Common Stock for sale in any jurisdiction or of the initiation, or the threatening, of any proceedings for that purpose, and (4) of the receipt of any comments, or requests for additional information, from the Commission or any state regulatory authority; and if the Commission or any state regulatory authority shall enter such a stop order or order suspending qualification at any time, the Parent will promptly use its best efforts to obtain the lifting of such order; (d) during any time when a prospectus is required to be delivered under the Act during the period required for the distribution of Common Stock, use its best efforts to comply with all requirements imposed upon it by the Act, as hereafter amended, and by the rules and regulations promulgated thereunder, so far as necessary to permit the continuance of sales of the Common Stock pursuant to a prospectus complying with Section 10(a)(3) of the Act; and if at any time when a prospectus relating to the Common Stock is required to be delivered under the Act and any event shall have occurred as a result of which, in the opinion of counsel for the Parent or the Investor's counsel, the prospectus relating to the Common Stock as then amended or supplemented includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend such prospectus to comply with the Act and the rules and regulations of the Commission, promulgated thereunder, the Parent 8  will promptly prepare and file with the Commission an appropriate amendment or supplement in form satisfactory to the Investor and the Investor's counsel; (e) use its best efforts, in cooperation with the Investor, at or prior to the time the registration statement becomes effective, to register or qualify the Registrable Securities for offering and sale under the securities laws relating to the offering or sale of the Common Stock in such jurisdictions as the Investor may reasonably designate and to continue the qualifications in effect so long as required for purposes of the sale of the Common Stock; provided, however, that no such qualification shall be required in any jurisdiction where, as a result thereof, the Parent would be subject to service of process for all purposes; in each jurisdiction where such qualification shall be effected, the Parent will, unless the Investor agree that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction; for the purposes of this paragraph, "best efforts" includes, but is not limited to, the same standard of care and degree of effort as the Parent will use to qualify its securities other than the Common Stock; (f) use its best efforts to cause the independent certified public accountants of the Parent to deliver to the Investor on the date that the registration statement becomes effective letters stating that they are independent certified public accountants within the meaning of the Act and the rules and regulations of the Commission thereunder, and that, in their opinion, the financial statements and other financial data of the Parent included in the registration statement or prospectus, or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Act, and such other financial matters as the underwriter, if any, or the Investor may reasonably request; (g) after the effective date of such registration statement, prepare, and promptly notify the Investor of the proposed filing of, and promptly file with the Commission, each and every amendment or supplement thereto or to any prospectus forming a part thereof as may be necessary to make any statements therein not misleading in any material respect; provided, however, that no such amendment or supplement shall be filed if the Investor shall object thereto in writing promptly after being furnished a copy thereof; (h) furnish to the Investor, as soon as available, copies of any such registration statement and each preliminary or final prospectus, or supplement or amendment prepared pursuant thereto, all in such quantities as the Investor may from time to time reasonably request in order to facilitate the public sale or other disposition of the Common Stock; (i) pay all costs and expenses incident to the performance of the Parent's obligations under this Section 4, including without limitation the fees and disbursements of the Parent's auditors and 9  legal counsel, and of legal counsel responsible for qualifying the Registrable Securities under state securities or blue sky laws, all filing fees and printing expenses, all expenses in connection with the transfer and delivery of the Registrable Securities, and all fees and expenses in connection with the qualification of the Registrable Securities under state securities or blue sky laws; provided, however, that the Parent shall not be responsible for compensation and reimbursement of expenses to underwriters or selling agents for the included Registrable Securities. 4.3 Agreements by Investors. In connection with the filing of a registration statement pursuant to this Section 4, if the Investor participates in the offering of the Registrable Securities, the Investor shall: (a) furnish the Parent all material information requested by the Parent concerning the Investor and his affiliates and his affiliates' holdings of securities of the Parent and the proposed method of sale or other disposition of the Registrable Securities and such other information and undertakings as shall be reasonably required in connection with the preparation and filing of any such registration statement covering all or part of the Registrable Securities and in order to ensure full compliance with the Act and the rules and regulations of the Commission thereunder; (b) if the Parent is at the time entering into an underwriting agreement covering its Common Stock, enter into an underwriting agreement in customary form with the same underwriter or underwriters who are parties to such underwriting agreement with the Parent, provided that the sales of Exchange Common Stock by the Investor and the Parent thereunder are at the same price and upon the same terms and conditions; and (c) cooperate in good faith with the Parent and its underwriters, if any, in connection with such registration, including placing shares of Exchange Common Stock to be included in such registration statement in escrow or custody to facilitate the sale and distribution thereof. 4.4 Indemnification. (a) The Parent shall indemnify and hold the Investor harmless, and each person, if any, who controls the Investor, against any loss, liability, claim, damage and expense whatsoever (including but not limited to reasonable attorneys' fees and any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which any of the Investor or such underwriter or such controlling person becomes subject, under the Act or otherwise, insofar as such loss, liability, claim, damage and expense (or actions in respect thereof) arise out of or are based upon any untrue statement of any material fact contained in (1) a registration statement covering the Common Stock, in the prospectus 10  contained therein, or in an amendment or supplement thereto or (2) in any application or other document or communication executed by or on behalf of the Parent or based upon written information furnished by or on behalf of the Parent filed in any jurisdiction in order to qualify the Common Stock under the state securities or blue sky laws thereof or filed with the Commission, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Parent shall not be obligated to indemnify the Investor in any such case to the extent that any such loss, claim, damage, expense or liability arises out of or is based upon any untrue statement or omission made in reliance upon, and in conformity with, written information duly executed and furnished by the Investor or such underwriter or such controlling person specifically for use in the registration statement, or any amendment or supplement thereto, or any application, as the case may be. If any action is brought against a person in respect of which indemnity may be sought against the Parent pursuant to the foregoing paragraph, such person shall promptly notify the Parent in writing of the institution of such action and the Parent shall assume the defense of the action, including the employment of counsel (satisfactory to the indemnified person in its or his reasonable judgment) and payment of expenses. The indemnified person shall have the right to employ its or his own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified person unless the employment of such counsel shall have been authorized in writing by the Parent in connection with the defense of the action, or unless the Parent shall not have promptly employed counsel to have charge of the defense of the action or unless the indemnified person shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Parent (in which case the Parent shall not have the right to direct the defense of the action on behalf of the indemnified person), in any of which events these fees and expenses shall be borne by the Parent. Anything in this paragraph to the contrary notwithstanding, the Parent shall not be liable for any settlement of any claim or action effected without its written consent, which shall not be unreasonably withheld. The Parent's indemnity agreements contained in this Subsection shall remain in full force and effect regardless of any investigation made by or on behalf of any indemnified person and shall survive any termination of this Agreement. The Parent agrees promptly to notify each holder of the commencement of any litigation or proceedings against the Parent or any of its officers or directors in connection with any registration statement pursuant to this Section 4. 11  The Parent further agrees that, if the indemnity provisions of the foregoing paragraphs are held to be unenforceable, any holder or controlling person of such holder may recover contribution from the Parent in an amount which, when added to contributions such holder or controlling person has theretofore received or concurrently receives from officers and directors of the Parent or controlling persons of the Parent, will reimburse such holder or controlling person for all losses, claims, damages or liabilities and legal or other expenses; provided, however, that if the full amount of the contribution specified in this Subsection 3(a) is not permitted by law, then such holder or controlling person shall be entitled to contribution from the Parent to the full extent permitted by law. (b) If the Investor chooses to include all or a part of the Common Stock the Investor holds in a public offering, then the Investor agree to indemnify and hold harmless the Parent and each of its directors and officers who have signed any such registration statement and each person, if any, who controls the Parent, to the same extent as the indemnity by the Parent in this Subsection 4(a), but only with respect to untrue statements or omissions, if any, made in such registration statement, prospectus contained therein, or amendment or supplement thereto, or in any application, in reliance upon, and in conformity with, written information duly executed and furnished by the Investor to the Parent specifically for use in the registration statement, in the prospectus contained therein, or any amendment or supplement thereto, or any application, as the case may be. In case any action shall be brought in respect of which indemnity may be sought against the Investor, the Investor shall have the rights and duties given to the Parent, and the persons so indemnified shall have the rights and duties given to the Investor, by the provisions of the first paragraph of Subsection 4(a). 4.5 Penalty Warrants. The Parent shall issue to the Investor warrants to purchase shares of Common Stock to be evidenced by a Warrant Certificate ("Penalty Warrants") in accordance with the following provisions: (a) If the Required Registration Statement is not filed with the Commission by June 4, 2004, then the Parent shall promptly issue to the Investor Penalty Warrants to purchase an aggregate of 250,000 shares of Common Stock. (b) If the Required Registration Statement is not declared effective under the Act by July 15, 2004, then the Parent shall promptly issue to the Investor Penalty Warrants to purchase an aggregate of 350,000 shares of Common Stock. (c) At the end of each month following July 31, 2004, (i) if the Required Registration Statement is not declared effective under the Act during such month, then the Parent shall promptly issue to the Investor Penalty Warrants to purchase an aggregate of 350,000 shares of Common Stock, or (b) if the Required Registration Statement is declared effective under the Act during such month, then the Parent shall promptly issue to the Investor Penalty Warrants to purchase an aggregate number of shares of Common Stock calculated by multiplying 350,000 by a fraction the numerator of which is the numerical date in 12  such month that the Required Registration Statement is declared effective under the Act and the denominator of which is the total number of days in such month. (d) Notwithstanding anything else herein to the contrary, the maximum number of Penalty Warrants issuable hereunder shall be limited to Penalty Warrants to purchase an aggregate of 1,500,000 shares of Common Stock. (e) The Penalty Warrants shall be issued on the terms and conditions in Section 4.6 below. - 4.6 Exercise of Warrants. (a) Exercise in Full. The Penalty Warrants (if any) may be exercised in full by the Warrantholder from the date hereof until the fifth anniversary of the date hereof (the "Final Exercise Date") by surrender of Penalty Warrant, with the Notice of Exercise Form at the end thereof duly completed and executed by such Warrantholder, accompanied by payment (if so elected), in cash or by certified or bank cashiers check payable to the order of the Parent, in the respective amount obtained by multiplying the number of shares of the Underlying Common Stock designated by the Warrantholder in the Notice of Exercise Form by the Exercise Price per share (after giving effect to any adjustments as provided in Section4.8 (below) to the Parent at its principal office at480 N. Sam Houston Parkway E., Suite 300, Houston, Texas 77060. (b) Partial Exercise. The Penalty Warrants (if any) may be exercised in part by the Warrantholder from the date hereof until the Final Exercise Date by surrender of the Warrants, with the Notice of Exercise Form at the end thereof duly executed by such Warrantholder, accompanied by payment (if so elected), in cash or by certified or bank cashiers check payable to the order of the Parent, in the respective amount obtained by multiplying the number of shares of the Underlying Common Stock designated by the Warrantholder in the Notice of Exercise Form by the Exercise Price per share (after giving effect to any adjustments as provided in Section 4.8 below). Upon any such partial exercise, the Parent at its expense will forthwith issue and deliver to or upon the order of the Warrantholder a new Warrant Certificate of like tenor, in the name of the Warrantholder thereof or as the Warrantholder (upon payment by such Warrantholder of any applicable transfer taxes) may request, calling in the aggregate for the purchase of the number of shares of the Underlying Common Stock equal to the number of such shares called for on the face of the respective Warrant Certificate (after giving effect to any adjustment herein as provided in Section 4.8 (below) minus the number of such shares designated ----------- by the Warrantholder in the aforementioned Notice of Exercise. (c) Required Exercise. The Warrantholder and the Parent hereby mutually agree that, if at anytime following the date hereof and until the fifth anniversary of the date of issuance (the "Final Exercise Date"), the average of the daily high bid and low asked prices of the Common 13  Stock is $1.25 or higher for each of 20 consecutive trading days as reported on the Over-the-Counter (OTC) trading system, all remaining unexercised Penalty Warrants (if any) shall be exercised and payment will be made as outlined above within forty-five (45) days after the Parent delivers notice of the foregoing to the Warrantholder. In the event that a Warrantholder fails to exercise any of the Warrants as required under this Section 4.6(c), the Parent may (but is not obligated to), upon written notice to such Warrantholder (a) cancel on its books the Warrant Certificates subject to the Penalty Warrants, (b) effect the exercise of any such unexercised Penalty Warrants (if any) in accordance with the Cashless Exercise procedures set forth below and (c) deliver any proceeds from the Cashless Exercise to the Warrantholder(s) at the address specified by the Warrantholder(s). (d) Payment of Exercise Price. The Exercise Price shall be paid either by (i) delivering to the Parent, by check or by wire transfer, an amount equal to the Exercise Price per share of Underlying Common Stock multiplied by the number of shares of Underlying Common Stock then being purchased or (ii) through a special sale and remittance procedure (a "Cashless Exercise") pursuant to which the holder of the Penalty Warrant shall concurrently provide irrevocable instructions (A) to a Parent-designated brokerage firm to effect the immediate sale of the shares of Underlying Common Stock and remit to the Parent, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for such shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Parent by reason of such exercise and (B) to the Parent to deliver the certificates for the shares of Underlying Common Stock directly to such brokerage firm to complete the sale. (e) Parent to Reaffirm Obligations. The Parent will, at the time of any exercise of any Penalty Warrants, upon the request of the Warrantholder, acknowledge in writing its continuing obligation to afford to such Warrantholder any rights to which such Warrantholder shall continue to be entitled after such exercise in accordance with the provisions of this Agreement; provided, however, that if the Warrantholder shall fail to make any such request, such failure shall not affect the continuing obligation of the Parent to afford to such Warrantholder any such rights. 4.7 Delivery of Stock Certificates, etc., on Exercise. (a) Any exercise of the Penalty Warrants shall be deemed to have been effected immediately prior to the close of business on the date on which the Penalty Warrants with the Notice of Exercise Form and the payment (if elected) for the aggregate Exercise Price shall have been received by the Parent. At such time, the person or persons in whose name or names any certificate or certificates for shares of Underlying Common Stock shall be issuable upon such exercise shall be deemed to have become the holder or holders of record of the shares of Underlying Common Stock so purchased. As soon as practicable after the 14  exercise of any Penalty Warrants in full or in part, and in any event within ten days thereafter, the Parent at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of, and delivered to the purchasing Warrantholder, a certificate or certificates for the number of fully paid and nonassessable shares of the Underlying Common Stock to which such Warrantholder shall be entitled upon such exercise. (b) Unless the Underlying Common Stock has been registered under the Act, such securities, when issued, shall have the appropriate legend. 4.8 Anti-dilution Provisions. Subject to Subordination, the Penalty Warrants are subject to the following terms and conditions during the term thereof: (a) Adjustments. In case (i) the outstanding shares of the Common Stock shall be subdivided into a greater number of shares, (ii) a dividend in Common Stock shall be paid in respect of Common Stock, or (iii) the outstanding shares of Common Stock shall be combined into a smaller number of shares thereof, the Exercise Price per share in effect immediately prior to such subdivision or combination or at the record date of such dividend or distribution shall simultaneously with the effectiveness of such subdivision or combination or immediately after the record date of such dividend or distribution be proportionately adjusted to equal the product obtained by multiplying the Exercise Price by a fraction, the numerator of which is the number of outstanding shares of Common Stock prior to such combination, subdivision or dividend, and the denominator of which is that number of outstanding shares of Common Stock after giving effect to such combination, subdivision or dividend. Any dividend paid or distributed on the Common Stock in stock or any other securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable upon the conversion thereof. Whenever the Exercise Price per share is adjusted as provided in the immediately preceding paragraph, the number of shares of the Underlying Common Stock purchasable upon exercise of the Penalty Warrant (if any) immediately prior to such Exercise Price adjustment shall be adjusted, effective simultaneously with such Exercise Price adjustment, to equal the product obtained (calculated to the nearest full share) by multiplying such number of shares of the Underlying Common Stock by a fraction, the numerator of which is the Exercise Price per share in effect immediately prior to such Exercise Price adjustment and the denominator of which is the Exercise Price per share in effect upon such Exercise Price adjustment, which adjusted number of shares of the Underlying Common Stock shall thereupon be the number of shares of the Underlying Common Stock purchasable upon exercise of the Warrant or the Penalty Warrant (if any) until further adjusted as provided herein. 15  (b) No Adjustment for Small Amounts. Anything in this Section 4 to the contrary notwithstanding, the Parent shall not be required to give effect to any adjustment in the Exercise Price unless and until the net effect of one or more adjustments, determined as above provided, shall have required a change of the Exercise Price by at least ten cents, but when the cumulative net effect of more than one adjustment so determined shall be to change the actual Exercise Price by at least ten cents, such change in the Exercise Price shall thereupon be given effect. 4.9 Further Covenants of the Parent. (a) Dilution or Impairments. The Parent will not, by amendment of its certificate or articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Penalty Warrants or of this Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrantholder against dilution or other impairment. Without limiting the generality of the foregoing, the Parent: (i) shall at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Penalty Warrants, all shares of the Underlying Common Stock from time to time issuable upon the exercise of the Warrants and shall take all necessary actions to ensure that the par value per share, if any, of the Underlying Common Stock is at all times equal to or less than the Exercise Price per share; and (ii) will take all such action as may be necessary or appropriate in order that the Parent may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of the Penalty Warrants (if any) from time to time outstanding. 4.10 Transfer to Comply with the Securities Act of 1933. None of the Penalty Warrants (if any) or the Underlying Common Stock issued or issuable upon exercise of the Penalty Warrants may be sold, transferred or otherwise disposed of except to a person who, in the opinion of counsel for the Parent, is a person to whom such Penalty Warrants or Underlying Common Stock may legally be transferred without registration and without the delivery of a current prospectus under the Act with respect thereto and then only against receipt of an agreement of such person to comply with the provisions of this Section 4 with respect to any resale or other disposition of such securities. --------- 4.11 Warrant Certificate Legend. The Parent may cause the following legend to be set forth on each certificate representing the Penalty Warrants or the Underlying Common Stock issued or issuable upon exercise of the Penalty Warrants 16  not theretofore distributed to the public or sold to underwriters for distribution to the public pursuant to Section 4 hereof, unless counsel for the Parent is of the opinion as to any such certificate that such legend is unnecessary: "The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended or qualified under applicable state securities laws. Such warrant and other securities may not be sold or otherwise transferred except in a transaction which in the opinion of securities counsel reasonably satisfactory to the Parent is exempt from registration under applicable federal or state securities laws or pursuant to an effective registration statement thereunder." 4.12 Indemnification. To the extent permitted by law, an Investor will indemnify and hold harmless the Parent and its officers, directors, agents and employees, and each underwriter of the Parent selling securities in such registration statement, and any person who controls any of the foregoing within the meaning of the Securities Act or the Exchange Act, against any actual expenses (including legal fees and costs), losses, claims, damages (including settlement amounts) or liabilities (collectively, "Losses") to which the Parent or such officer, director, agent, employee, or underwriter or controlling person may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such Losses arise out of or are based solely upon any Violation that occurs in reliance upon and in conformity with written information furnished by, or on behalf of, such Investor expressly for use in connection with such registration; and such Investor will reimburse (as incurred) any Losses reasonably incurred by the Parent or its officers, directors, agents, employees, or underwriters or controlling persons in connection with investigating or defending any Violations; provided, however, that the indemnity agreement contained in this paragraph (a) shall not apply to amounts paid in settlement of any claims for Violations if such settlement is made without the consent of such Investor, which consent shall not be unreasonably withheld. As used herein the term "Violation" refers to any of the following statements, omissions or violations: (i) any untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein, or any amendments or supplements thereto, or (ii) the omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.13 Notice. Promptly after receipt of notice of the commencement of any action (including any governmental action), an indemnified party will, if a claim is to be made against any indemnifying party under this Section 4, deliver to the indemnifying party a written notice of the commencement, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party 17  similarly notified to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the opinion of counsel for the indemnifying party, representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in the proceeding. The failure to deliver written notice to the indemnifying party within a reasonable period of time after notice of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 4 to the extent such failure is prejudicial to its ability to defend such action, but the omission to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 4. 4.14 Indemnification Unavailable. If the indemnification provided for in this Section 4 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any Losses, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violations that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the Violation resulting in such Losses relates to information supplied by the indemnifying party or by the indemnifying party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such Violation. 4.15 Investors' Obligations. The obligations of the Investors under this Section 4 shall survive the completion of any offering of Registrable Securities and the termination of registration rights pursuant to Section 7.5. No Assignment of Rights. Neither of this Agreement nor the rights to cause the Parent to register Registrable Securities pursuant to this Agreement may be assigned in any manner by the Investors. 6. Delivery of Stock Certificates on Exchange. Any exchange of the Initial Shares shall be deemed to have been effected immediately prior to the close of business on the date on which the Parent issues the Common Stock. At such time, the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issued upon such exchange shall be deemed to have become the holder or holders of record of the shares of Common Stock. As soon as practicable after the Parent receives a notice from the holder of Preferred Stock to exchange it Initial Shares in full or in part for Common Stock, and in any event within ten days thereafter, the Parent at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of, and delivered to the exchanging holder, a certificate or certificates for the number of fully paid and nonassessable shares of the Common Stock to which such holder shall be entitled upon such exchange. Unless the Common Stock has been registered under the Act, such securities, when issued, shall have the appropriate legend. 18  7. Termination of Registration Rights. The registration rights granted hereunder this Agreement shall terminate as to each Investor on the earlier of (i) the time at which the Investor no longer holds any of the Initial Shares or Registrable Securities and (ii) the fifth (5th) anniversary of this Agreement. 8. Notices. Any notice, consent or other communication to be given under this Agreement by any party to any other party shall be in writing and shall be either (a) personally delivered, (b) mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or same-day local courier service, or (d) delivered by telex or facsimile transmission, as follows: If to the Parent or Company GulfWest Energy Inc. or GulfWest Oil & Gas Company 480 N. Sam Houston Parkway East Suite 300 Houston, Texas 77060 Attn: President Fax: (281) 260-8488 If to the Investors: To their respective addresses set forth on the signature page hereto, or at such other address as may be designated by the parties from time to time in accordance with this Section 8. Notices delivered personally, by overnight express delivery service or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given five business days after mailing. Notices delivered by telex or facsimile transmission shall be deemed given upon receipt by the sender of the answerback (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). 9. Amendments and Waivers. This Agreement may be amended and the observance of any term may be waived (either generally or in a particular instance and either retroactively or prospectively) only by written agreement of the Parent, the Company and the Investors. 10. Governing Law; Jurisdiction; Venue.This Agreement shall be governed by and construed under the laws of the State of Texas without regard to principles of conflict of laws. The parties irrevocably consent to the jurisdiction and venue of the state and federal courts located in Houston, Texas in connection with any action relating to this Agreement. 11. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement, and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 19  12. Entire Agreement; Counterparts. This Agreement constitutes the entire agreement between the parties about its subject and supersedes all prior agreements. This Agreement may be executed in two or more counterparts, which together shall constitute one instrument. 13. Captions; References. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. Wherever the context shall so require, all words herein in the male gender shall be deemed to include the female or neuter gender, all singular words shall include the plural, and all plural words shall include the singular. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PARENT: GULFWEST ENERGY INC. By: /s/ Thomas R. Kaetzer Name: Thomas R. Kaetzer Title: President and Chief Executive Officer COMPANY: GULFWEST OIL & GAS COMPANY By: /s/ Thomas R. Kaetzer Name: Thomas R. Kaetzer Title: President INVESTORS: By: /s/ By Each Investo